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The artificial intelligence (AI) boom this year has taken the tech world by storm. While the tech sector is brimming with options for investors looking to gain exposure, with the industry giants gaining lots of attention, many smaller players also deserve to be recognized.
My first pick is Super Micro Computer (SMCI), whose investors are celebrating this year's outsized gains of 257% YTD, compared to the 42% gain of the tech-heavy NASDAQ Composite ($NASX). Nonetheless, Wall Street expects the stock to rise even higher in the coming year.
My second pick is semiconductor company Semtech (SMTC), whose shares are down 22% YTD - yet analysts believe the stock could soar more than 36% by the end of 2024. Let's look at why these two are the best tech stocks to buy right now.
Super Micro Computer: 13% Upside
Super Micro Computer's dramatic gains this year don’t come as a surprise, given its outstanding efforts to capitalize on AI. SMCI, with a market cap of $16 billion, is smaller than its partners Nvidia (NVDA), Advanced Micro Devices (AMD), and Intel (INTC). Nonetheless, its ability to offer a high-performance computing experience with its servers, without compromising on size, has investors eyeing this growth stock.
SMCI is known for its energy-efficient offerings that align with the growing emphasis on sustainability in technology, serving cloud and edge computing, the Internet of Things (IoT), 5G networks, autonomous driving, and AI servers.
In its recently concluded first quarter of fiscal 2024, total revenue of $2.1 billion increased 13.5% year-over-year. Adjusted earnings per share (EPS) increased slightly to $3.43 from $3.42 in the prior year quarter.
Furthermore, the company is expanding its AI solutions with more efficient and powerful servers, with the help of AMD and Nvidia’s graphic processors.
Because of the high demand for its AI products, management now anticipates total revenue of $10-$11 billion for the full fiscal year, in line with analysts' predictions. Furthermore, analysts anticipate a 47.1% increase in adjusted EPS to $17.37 in fiscal 2024.
Management expects to achieve $20 billion in annual revenue in a "couple of years," a significant increase from the $10 billion to $11 billion revenue forecast for fiscal 2024.
SMCI is reasonably priced in comparison to other AI stocks in the industry, trading at 14 times forward earnings and 1.3 times forward sales. In fiscal 2025, revenue and earnings are expected to increase by 17% and 18%, respectively.
Overall, Wall Street rates Super Micro Computer stock as a “strong buy.” Out of the 7 analysts covering the SMCI, 5 rate it as a "strong buy," while 2 rate it as a "hold."
The average target price for SMCI is $340.43, implying expected upside potential of 13.4% over the next 12 months.
Semtech Corp: 36% Upside
Semtech, with a market cap of $1.43 billion, is a small company with the potential to grow larger as the AI market develops. The semiconductor industry is cyclical, with demand driven by smartphones and personal computers (PCs). While the larger players remained unaffected this year, smaller companies, such as Semtech, were impacted by slower smartphone and PC demand. Rising inflation also reduced consumer spending on discretionary items, primarily electronics.
In the third quarter of fiscal 2024, net sales of $200.9 million increased 13.1% year-over-year, beating analysts’ estimates of $200.5 million. Adjusted EPS came in at $0.02, lower than $0.65 per share in the prior-year quarter, but outperforming analysts' expectations for a loss per share of $0.15.
Operating expenses fell sequentially to $105 million in the third quarter. CFO Mark Lin stated, "We continue to optimize our cost structure with non-GAAP operating expenses and non-GAAP interest expense, each forecasted to sequentially improve in the fourth quarter.” As a result, the company now anticipates that fourth-quarter operating expenses will be reduced by 10% to $74 million (plus or minus $2 million).
One of Semtech's most revolutionary contributions has been the development of LoRa (long-range) technology, a game-changer in the realm of IoT. LoRa technology enables long-distance, low-power communication for IoT devices, allowing for connectivity across vast distances while conserving energy.
Management stated on the Q3 earnings call, “Adoption of LoRa-based solutions in the utility space gained further traction in Q3 with multiple European-based utilities announcing RFPs with a requirement for a LoRa solution.”
Looking ahead to Q4, management anticipates a decrease in net sales from the high-end consumer market due to macroeconomic conditions. In the fourth quarter, total revenue is expected to be around $190 million (plus or minus $10 million). Furthermore, earnings could range from a $0.05 loss per share to a $0.06 profit per share.
Meanwhile, analysts are targeting revenue of around $190.7 million and a loss of $0.04 per share. For the full fiscal year ending January 2024, analysts predict revenue growth of 14.5% to $866.5 million, with EPS of around $0.11. As the demand for IoT connectivity continues to surge, Semtech remains poised to grow.
Overall, Wall Street rates SMTC as a “strong buy.” Out of the 12 analysts covering SMTC, 10 have a “strong buy” recommendation, while one suggests a “moderate buy,” and one rates it a “hold.”
Based on analysts' average price target of $30.50, Wall Street sees potential upside of about 36% over the next 12 months.
